Understand the ROI formula, how to interpret it, annualize it and recognize its limits when measuring investment profitability.
Return on investment, or ROI, measures the gain or loss obtained relative to the cost of an investment. It provides a quick percentage measure of a project’s profitability.
The Bethemesh ROI calculator automatically calculates total cost, net gain and ROI.
Total cost = initial investment + additional costs
Net gain = gains generated − total cost
ROI = (net gain / total cost) × 100
With an initial investment of €10,000, €1,000 in additional costs and €15,000 in gains, total cost is €11,000 and net gain is €4,000. ROI is therefore about 36.36%.
An ROI above zero means gains exceed costs. Zero corresponds to break-even, while a negative ROI indicates a net loss.
A 25% ROI means every euro of total cost produced about €0.25 in net gain. A 100% ROI means net gain equals total cost.
Simple ROI ignores duration. A 40% ROI achieved in one year does not have the same economic meaning as the same ROI achieved over five years.
When duration is known, a compound annualized return can be estimated:
Annualized return = (gains / costs)^(1 / number of years) − 1
This assumes a regular compound progression and is therefore a comparison indicator rather than a reconstruction of actual cash flows.
For investments where interest is actually compounded, use the compound interest calculator.
ROI compares net gain with an investment. Margin instead measures the difference between a selling price and a purchase or cost price.
For pricing analysis, use the margin calculator.
ROI is useful because it is simple, but it does not by itself describe risk, exact cash-flow timing, financing costs, inflation or the time value of money. It is best treated as a summary indicator rather than a complete financial analysis.
Learn how to calculate commercial margin, distinguish margin rate from markup rate and set a selling price from a target margin.
Understand the compound interest formula and the effect of rate, time and regular contributions, with examples and a calculator.
Understand what margin, break-even point, ROI and EBITDA measure and when each indicator is useful.